Friday, February 7, 2020

Reader Question: Switching Portfolios

A reader, Doug, asked the following interesting (lightly-edited) question about whether it’s time to switch portfolios:

I currently have over $200K in my RRSP sitting in TD e-series mutual funds (25% bonds, 25% each in CDN/US/Int'l Equity). The resulting MER is 0.37%.

Does it now make sense for me to switch over to ETFs? I was thinking another Canadian Couch Potato portfolio with the ETFs VAB and VEQT. The MER is around 0.22%, a savings of $300 per year. However, I'm very comfortable with e-series funds as I've been using them for 6 years.

With ETFs, I also have to pay commissions to buy which will amount to perhaps $120 to $240 per year as I purchase twice a month.

What are your thoughts? Any other pros and cons that you can think of? Does it make sense to switch given the saying that perfection is the enemy of good?

First of all, Doug, congratulations on amassing over $200k in savings over 6 years. You’ve given yourself more choices in life.

Your last question is an important one. No matter what your portfolio looks like, there will be some change you could that would seem to improve it. Some investors take the obsession for perfection too far.

There is nothing wrong with sticking to your TD e-series funds. You’ve obviously built a steady saving habit using these funds that is working for you. Even if your portfolio were 10 times larger, paying an extra $3000 per year (or $250 per month) is certainly tolerable, particularly when you have $2 million in invested assets.

But I understand the desire to cut costs. This is a choice I’ve made myself. You’re right that commissions could take a bite out of any MER savings. One solution would be to get an account that doesn’t charge commissions on ETF purchases. Another would be to allow cash to build up somewhat and trade less frequently.

Consider these potential changes carefully, though. Are you going to continue saving as well as you have been with this disruption to your current habits? Only you can answer this question.

I can see a number of sensible ways forward. One is to make the change all at once. Another is to open a new trading account and direct new savings to this account for a while before sending all your TD e-series assets to the new account. Or you could defer the decision about making this change for a few years when your portfolio is larger. Finally, you could decide to stick with e-series indefinitely.

If your current costs were much higher, I would say they will ultimately affect your life negatively. However, the differences among these approaches are fairly small compared to the big things in life like health, family, and friends.

10 comments:

  1. I have been wondering about the same switch. Instead of comparing MERs I compared post-MER growth of TD index funds vs Vanguard's ETFs. In my calculation I consistently win with TD over the last 5 years.

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    1. @AnatoliN: Many of Vanguard Canada's ETFs haven't been around for 5 years. Do you think there's reason to believe that TD e-series will outperform VEQT/VAB (before costs) in the future?

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    2. if I only knew the future :)
      I see no reason for ETFs to perform worse than TD index funds, except that is what I observe to my surprise.
      Do you see a logical basis to expect the situation to flip?

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    3. @AnatoliN: My expectation is usually for index funds to match the market before costs and to lag the market by the amount of their costs. Sometimes it doesn't work out this way if the indexes are slightly different or for other reasons.

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  2. Doug, should strongly consider moving his account to Questrade. They don't charge commissions on EFT purchases. They only charge them when you sell ETFs.

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    Replies
    1. @Mike: Good suggestion if Doug chooses to make the switch.

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  3. I had a similar situation and I contributed monthly to the funds and once a year would sell a whack and purchase the ETF. Even doing this twice a year only cost two commissions per ETF.

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    1. @Anonymous: That's an interesting compromise. Now that it's possible to buy ETFs commission-free it's probably easier to do it that way, but your blended idea works too.

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    2. Can I buy ETFs commission-free at webbroker?

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    3. AnatoliN: As far as I could tell from their web site, Webbroker charges commissions for ETF purchases.

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